Quick answer
A merchant cash advance buys a slice of your future revenue and takes it back in fixed daily or weekly ACH debits, whether or not your customers have paid you yet. Invoice factoring buys a specific invoice you have already earned and is repaid once, when that customer pays. For a B2B company with commercial receivables, factoring is the structurally safer of the two, because repayment is matched to the cash it advanced against rather than to a calendar.
Key takeaways
- An MCA is repaid on a fixed schedule from your bank account; factoring is repaid by a specific customer paying a specific invoice.
- MCAs are priced with a factor rate such as 1.30, not an interest rate, and the total owed is usually fixed at signing.
- A short repayment window turns a modest-looking factor rate into a high annualised cost — do the arithmetic before signing.
- Factoring fees are charged per invoice at 1%–3.5% per 30 days and stop as soon as you stop factoring.
- Stacking several MCAs is a common route into a cash crisis; factoring capacity grows with invoices instead of adding debits.
What is each product actually buying?
A merchant cash advance is the purchase of a portion of your future receipts. The funder advances a lump sum today and buys the right to a share of revenue that has not yet been earned. There is no specific invoice behind it and no identified payer — the collateral, in substance, is your bank account's future deposit activity.
Invoice factoring is the purchase of a receivable that already exists. The work has been performed, the goods delivered, the invoice issued, and a named commercial customer owes a specific amount on a specific date. The factor buys that claim and collects it.
The products originated in different worlds. MCAs were built for card-accepting retail and hospitality businesses with daily consumer takings and no receivables to speak of. Factoring was built for B2B sellers whose problem is not a lack of sales but a 30, 60 or 90-day wait to be paid for them. If you invoice businesses on terms, you are in the second category, and the first product is solving a problem you do not have.
| Invoice factoring | Merchant cash advance | |
|---|---|---|
| What is sold | A specific existing invoice | A share of future, unearned revenue |
| Who repays | Your customer | You, from your bank account |
| Repayment schedule | Once, when the invoice is paid | Fixed daily or weekly ACH debits |
| Priced as | A discount fee, 1%–3.5% per 30 days | A factor rate, e.g. 1.30 of the amount advanced |
| Total cost if you repay faster | Falls — the fee accrues with time | Usually unchanged — the total is fixed at signing |
| Effect of a slow sales month | You simply factor fewer invoices | The debit continues regardless |
| Security filing | UCC-1 on accounts receivable | UCC-1, often on all assets |
| Customer contact | Notice of assignment; factor collects | None — the funder debits you |
| Scales with | Invoices issued to approved customers | Nothing — a new advance means a new contract |
| Suited to | B2B and B2G sellers on terms | Card-based retail with no receivables |
How is the money actually collected?
This is the difference that shows up in daily operations. An MCA is typically collected by fixed ACH debits from your operating account every business day, or weekly. The amount is set at signing. It does not pause for a slow week, a lost contract, a customer who pays late, or a seasonal trough.
Some MCAs are structured as a percentage holdback of card receipts, which does flex with sales. Fixed-debit structures are more common in non-card businesses, and it is the fixed debit that causes the damage, because it converts a variable business into a fixed obligation at exactly the moment variability is the problem.
Factoring collects from a third party. When you factor an invoice, the money comes back to the factor from your customer. If you stop submitting invoices, the cost stops. There is no standing instruction against your operating account and no amount leaving your balance on a day when nothing came in.
The second-order effect matters too. A daily debit sits ahead of payroll, fuel, suppliers and taxes in practice, because it executes automatically while your other obligations require a decision. Businesses in trouble often discover that their cash is being allocated by an ACH schedule rather than by management.
Which is more expensive, and how do I compare them?
You cannot compare a factor rate with a monthly discount fee directly. A factor rate of 1.30 means you repay 1.30 times what you received — $130,000 on $100,000 — and it is expressed as a multiple, not as a rate per unit of time. The cost of that multiple depends entirely on how quickly it is repaid: the same 1.30 repaid over six months is roughly twice as expensive, per unit of time, as the same 1.30 repaid over twelve.
To compare anything with anything, convert both to dollars of cost and to a simple annualised figure on the money actually outstanding. Because an MCA amortises daily, the average balance outstanding over the term is roughly half the amount advanced — which is why the annualised cost is far higher than the headline multiple suggests.
Raising about $100,000 of working capital two ways. Illustrative arithmetic to show the structure of the cost — not a quote, and not a statistic about the market.
| MCA — amount advanced | $100,000 |
|---|---|
| MCA — factor rate 1.30, total repayment | $130,000 |
| MCA — 130 daily ACH debits over roughly six months | $1,000 per business day |
| MCA — cost of the money | $30,000 |
| MCA — average balance outstanding across the term | about $50,000 |
| MCA — simple annualised cost ($30,000 on ~$50,000 over 6 months) | about 120% |
| Factoring — invoice face value factored | $111,000 |
| Factoring — advance at 90% | $99,900 |
| Factoring — fee at 2% per 30 days, customer pays day 45 (3% of face) | $3,330 |
| Factoring — reserve released on payment | $7,770 |
| Factoring — simple annualised cost ($3,330 on $99,900 over 45 days) | about 27% |
The comparison has to be like for like on duration: the MCA is six months of money, the single factored invoice is about 45 days of it. Rolling that $111,000 invoice continuously for six months — four 45-day cycles — would cost roughly $13,320 in fees while keeping about $100,000 of cash in the business, against $30,000 for the MCA, with no fixed debit on any day.
Why doesn't an MCA quote show an APR?
Because an MCA is generally documented as a purchase of future receivables rather than a loan, and in many commercial contexts there is no requirement to disclose an annual percentage rate the way a consumer lender must. The quote you are shown is typically the advance amount, the factor rate, the payback total and the daily debit. All four are true and none of them tells you the cost per unit of time.
A growing number of states have introduced commercial financing disclosure requirements, and some funders disclose an estimated APR voluntarily. Do not rely on either. Whatever you are shown, work out the two numbers yourself: total dollars of cost, and dollars of cost per month of money actually held.
Factoring quotes are not automatically clearer. A "1% rate" can mean 1% per 30 days, 1% per 10-day increment, or 1% plus a separate servicing fee. Ask the same questions of both products.
- What is the total dollar amount I will repay, including every fee?
- Over how many days or weeks, and on what collection schedule?
- Does repaying early reduce the total I owe — and by how much, in dollars?
- What happens if a debit fails, or if I miss a week?
- Is there an origination, underwriting, ACH or servicing fee on top of the quoted rate?
- What does the UCC filing cover, and does it block other financing?
What happens when a customer pays late?
Under an MCA, nothing changes. The debit is calculated from the contract, not from your receipts, so a customer who pays on day 75 instead of day 45 is entirely your problem. Your cash position deteriorates while the repayment continues at full speed. This is the mismatch at the heart of using an MCA in a B2B business: the money goes out on a fixed schedule while it comes in on an unpredictable one.
Under a factoring agreement, late payment is handled inside the structure. The fee continues to accrue for the extra time, which costs you more — that is real. But there is no fixed withdrawal from your account in the meantime, and in a recourse arrangement you only face a chargeback if the invoice goes unpaid past the agreed recourse period, commonly 60 to 120 days. A non-recourse program can absorb the loss entirely if the customer becomes insolvent.
Factoring also puts a professional collections function behind the invoice. A factor chasing a large payer tends to get a faster answer than a small supplier does, and the credit checks performed before funding often flag a deteriorating customer before you would have noticed.
Can I switch to factoring if I already have an MCA?
Often, yes — this is one of the more common reasons businesses come to a factor. The obstacle is usually the UCC filing. Most MCA agreements include a UCC-1 that covers accounts receivable, and a factor needs first position on those accounts, so the existing filing has to be dealt with before anything funds.
- 1Pull your UCC filings. Search the public UCC records in your state of formation. Businesses that have taken several advances are frequently surprised by how many filings exist and what they cover.
- 2Get written payoff figures. Request a payoff letter from each funder, valid to a specific date. Note whether any discount is offered for early settlement — some MCA contracts offer none, in which case the full balance is owed.
- 3Share the full picture with the factor. Disclose every advance, including any you are behind on. A factor will find them in the UCC search, and a late disclosure is more likely to end the conversation than the balance itself.
- 4Structure the payoff. In many cases the first factoring advance is used to retire the MCA balances, with the funder paying the MCA companies directly and obtaining UCC terminations.
- 5Stop stacking. Taking a further advance during this process will usually stall or kill it. Each additional filing is another party whose consent or payoff is required.
Is an MCA ever the right answer?
It can be, in a narrow set of circumstances — and being honest about them is more useful than pretending otherwise. If your revenue is card-based consumer sales with no commercial invoices behind it, factoring is simply unavailable to you, because there is no receivable to buy. If you need a small amount of cash within 48 hours and have no eligible invoices, an MCA may be the only product that moves that fast.
What makes the decision go wrong is using an MCA when you do have a receivables ledger. A B2B company with $400,000 of unpaid invoices on 45-day terms is sitting on the exact asset that factoring is designed for, and it is paying a daily debit instead.
- Choose factoring if you invoice other businesses or government agencies on terms.
- Choose factoring if a fixed daily withdrawal would be dangerous in a slow month.
- Choose factoring if you want the cost to scale down automatically when volume falls.
- An MCA may be the only option if your sales are consumer card revenue with no invoices.
- Never take a second advance to service the first — that is the point at which most cash crises begin.
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Written and reviewed by the National Invoice Factoring funding team — specialists in receivables and trade finance since 2009.
